Eicher Motors - Exceeds expectations, upgrade to Buy - Centrum

Eicher Motors (EML) 1QCY13 overall results were significantly ahead of our expectations both at Royal Enfield (RE) level and at VECV. While RE's EBITDA margins stood at 17.7% significantly higher than our estimate of 13%, VECV's margins stood at 8% compared to our estimate of 6.3% reflecting relative strength despite challenging environment and high discounting prevailing in the M&HCV industry. Driven by better than expected operating performance at RE and VECV, consolidated EBITDA margins stood at 9.9% and expanded by 275bps QoQ. Consolidated PAT after MI stood at Rs.979mn. Driven by better than expected performance, higher than expected capacity expansion in RE and relative strength seen in VECV business, we are upgrading the stock from Neutral to Buy with revised target price of Rs.3,884 driven by upward revision in earnings and roll forward of valuations to CY14E.

- Q1CY13 numbers surprised on the upside for RE as well as VECV: RE reported 51% YoY growth in revenues owing to 45% YoY growth in volumes, price hikes and, improvement in product mix. EBITDA margin at RE stood at 17.7% – up nearly 385bps YoY – on soft commodity prices as also positive operating leverage from higher volumes. Consequently, standalone PAT at Rs972mn was up nearly 114% YoY. VECV also fared better than expectations, as EBITDA margin improved to 8% from 6.2% in Q4CY12 (10.3% in Q1CY12) despite heavy discounting in the industry. Consolidated PAT at Rs979mn was down 11% YoY but up ~35% QoQ and exceeded our expectations.

- Conference call highlights: 1.) For RE, management targets to sell 175,000 units in CY13E and 250,000 units in CY14E. The new plant at full capacity will be able to produce 500,000 units 2.) For RE, 260 dealers in India (5-6 dealers/month being added 3.) Engine plant: pre-production stage; test engines are being dispatched to test centers in France. Phase-I (2013 – early 2015): 25,000 units and Phase II and III: >100,000 units. As installation starts in new models when new norms kick in, ramp-up should happen fast. Rs5bn in total capex (Phase I: Rs3bn) for 100,000 units capacity. 4.) Dealer ramp-up on VECV: Around 250 currently. 40 plus this year. A very different profile of dealer in this business where investment required is higher and other pieces need to be handled (Financing arrangements). Besides, upgrade of existing dealers to handle HD trucks also underway.

- Valuations and Recommendations: At the CMP of Rs3,279, the stock is currently trading at 19.1x CY13E EPS of Rs.172 and 13.3x CY14E EPS of Rs.246. Driven by better than expected performance in 1QCY13, higher than expected capacity expansion in RE and relative strength seen in VECV business, we are upgrading the stock from Neutral to Buy with revised target price of Rs.3,884 ( earlier Rs.2,433) driven by upward revision in earnings and roll forward of valuations to CY14E.

Source : Equity Bulls

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